Magufuli's mission

03 Jul 2017

Kenya

Sudan

Delivering Growth and Opportunity

Africa Riskwatch - Issue 10 - July 2017

John Magufuli: An unpredictable head of state

Short-lived honeymoon
President John Magufuli made international headlines in October 2015 when he was elected amid a wave of optimism stemming from his tough stance against corruption. Magufuli quickly embarked on a campaign to tackle public sector graft and to dismantle corruption networks in his first year in office. Investors and international media were impressed: it seemed that an African leader was matching election rhetoric with action, and that a promise to tackle corruption was being fulfilled.

Non-stop dismissals, stalled policy

However, optimism has waned as high-profile dismissals of allegedly corrupt politicians have remained Magufuli’s only policy tool. Tangible public sector reforms have yet to be implemented, and no concrete changes in the structure or processes of state institutions have been introduced. Moreover, some government officials have been removed after disagreeing with the president, rather than for being implicated in misconduct. The manager of state electricity company Tanesco, for example, was dismissed after failing to consult Magufuli over power tariff increases despite their approval by the regulator. A climate of uncertainty and fear of contradicting the president has since pervaded the public sector, and is likely to continue to slow decision- and policy-making.

Extractives under scrutiny

Magufuli has adopted harsh rhetoric against foreign investors, threatening licence revocations where projects have failed to start generating revenue for the government. The quest for revenues has made mining and the wider extractives industry the obvious target for the government. While mining currently contributes 5% of GDP and a similar share of tax revenues, the president has argued that this could be increased if companies invested more and paid their fair share of taxes. In keeping with this assessment, mining companies in January were hit with higher tax bills.

Meanwhile, two presidential committee audits released in May suggested that the government had lost up to USD 48bn of tax revenue over two decades because of the under-declaration of mineral exports and the overly generous terms of Mining Development Agreements (MDAs). Magufuli intends to have all MDAs reviewed to edit clauses that he perceives as placing the country at a disadvantage. The government is intent on having MDAs and Production Sharing Agreements (PSAs) in the oil and gas industry renegotiated in coming year, leading to a rise in contract risks.

Three bills proposing amendments to extractives sector regulations have been passed in parliament in the past week to empower the government – and the president specifically – to undertake the MDA review process. These are the Natural Wealth and Resources Contracts (Renegotiation of Unconscionable Terms) Bill 2017, and the Natural Wealth and Resources (Permanent Sovereignty) Bill 2017 which allow the government to undertake contract reviews and emphasise the Tanzanian government’s ownership over natural resources respectively. Meanwhile the Written Laws (Miscellaneous Amendments) act allows the government to increase its shareholding in mining companies.

Opportunities remain, but caution is necessary

While such developments should be a serious cause for concern for investors, it is likely that clauses in the new legislation to empower the government to cancel licences are more likely to be used as a threat or a last resort, rather than applied indiscriminately. Magufuli’s main aim is to use the legislation as a bargaining chip to increase the government’s share of extractive industry profits, and to ensure local content and employment.

Some companies have been able to secure new mining and investment licences in recent months, despite the sector’s intense politicisation and the president’s personal involvement. This has been achieved by working closely with key government officials and stakeholders. The government is clearly keen to keep revenues from extractives flowing, and foreign investment remains vital to developing the full potential of Tanzania’s extractives sector. The administration has neither the funding nor the capacity to profitably run large projects.

Tanzania’s wider economic development plan also hinges on the government’s ability to continue to attract foreign investors if it is to meet its tax revenue target – which the IMF recently described as highly ambitious – and decrease the country’s reliance on development aid. The president’s willingness to engage with mining companies on the audit reports demonstrates some recognition of this need, and indeed ministries at times offer quieter placatory statements to counter Magufuli’s noisier nationalist rhetoric.

Staying on the president’s good side has become a necessity for operations in Tanzania. But this is also the time to invest in strategic central and local government relationships, while demonstrating that local capacity-building initiatives are a priority for businesses.

In this Newsletter we talk about the ongoing corruption investigations in Saudi Arabia, the cost of readiness vs the impact of failure, conflict scenario in the Korean peninsula and risks from engaging with third parties.

In this issue, we also discuss two East African countries that are likely to see strong economic activity in the coming months, despite scepticism around them. In Sudan, major improvements in the business environment are beckoning as permanent sanctions removal appears increasingly likely.